Buffett Rule’ a bust in California

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If President Obama really wants to see the “Buffett Rule” in action, he should look at California’s tax system. The state has been plagued by it for years.

The revenue stream is unstable and the state budget has been a deficit disaster.

Soaking the rich — relying heavily on them for income taxes — has resulted in a precarious revenue roller coaster ride. It’s either boom or bust in Sacramento, depending on how the wealthy are faring in the stock market and their other investments.

Billionaire investor Warren E. Buffett’s rule is that he shouldn’t be paying a lower income tax rate than his secretary or any middle-class taxpayer.

“Legislators in Washington,” Buffett complained in a New York Times opinion piece last month, “feel compelled to protect us [mega-rich] much as if we were spotted owls or some other endangered species…. My friends and I have been coddled long enough by a billionaire-friendly Congress.”

With rhetorical flourish, Obama incorporated the Buffett Rule into the deficit-cutting plan he announced Monday, declaring that people earning more than $1million shouldn’t be allowed to pay a lower tax rate than middle-income families.

In California, we’ve got what you could call a Buffett Rule-Plus. There’s an extra tax bracket — at 10.3% — for income exceeding $1million.

According to the state finance department, families with adjusted gross incomes of between $1 million and $2 million, on average, paid an overall state tax rate of 8.4% in 2008, the last year for which data are available. The average rate rose as incomes did to 9.3% for those earning $5 million and up. (There were 3,757 of them.)

Families earning between $200,000 and $300,000 paid, on average, 5.5%. The rate fell sharply as incomes tailed off: 1.4% at $70,000 to $80,000, and only 0.2% at $40,000 to $50,000.

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I’m sure Mr. Buffett only pays that lower rate because his accountants ignored his instructions to process his taxes without allowing any deductions.

He must be equally embarrassed that, after they ignored his tax instructions, they again ignored his instructions to write a check to the government for his “underpayment”.

I showed why this is the case a month or two back. Consider this; When economic times are good, the higher income earners gains in income over the previous year are higher than the bottom 50%. However, when economic times get rough, like, for example, following the Dotcom bust, the incomes of the higher wage earners shrinks, while those in the bottom 50% hold firm, or even continue growth. And, this happens not only during the highly noticeable economic slumps or recessions, but even the mild ones as well.

What does this mean? Well, for one, it means that during those economic bumps in the road, that neither the federal government, nor the state governments, will maintain their revenue levels. It also means that the higher income earners cannot be counted upon to pay for everything like the liberal/progressives wish them to do.

And, when those high income earners continue to “sit” on their extra cash instead of investing it and pouring it back into their businesses, or the businesses of others, that growth is stagnant and government revenue streams also become stagnant, or worse, start to tail off.